Western Bank & Trust Co. v. Commissioner

WESTERN BANK & TRUST CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Western Bank & Trust Co. v. Commissioner Docket Nos. 28542, 29180, 39948. United States Board of Tax Appeals 19 B.T.A. 401; 1930 BTA LEXIS 2402; March 26, 1930, Promulgated *2402 1. The basis for computing gain or loss upon the sale of stock in 1922 and 1925 determined. 2. Debts found to be recoverable in part only during the years 1924, 1925, and 1926 may be charged off in part. H. B. McCawley, Esq., and Robert E. Lynch, Esq., for the petitioner. R. W. Wilson, Esq., for the respondent. MORRIS *401 These proceedings, consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes for the years 1922, 1924, 1925, and 1926 of $5,578.55, $4,377.37, $16,913.54, and $4,336.18, respectively. The issues presented for consideration are: (1) The basis to be used in determining gain or loss on the sale of securities in 1922 and 1925; and (2) Whether the respondent was correct in disallowing as a deduction a portion of a debt charged off in 1924 and a portion in 1925, and an alleged loss charged off in 1926. FINDINGS OF FACT. The petitioner is a banking corporation, located in Cincinnati, Ohio, which prior to 1913 was known as the Western German Bank. For the purpose of the findings of fact and opinion herein, the petitioner and its predecessor in name will be indiscriminately*2403 referred to as the bank. Throughout the period herein referred to the bank *402 dealt in securities, confining its activities to the purchase and sale of municipal, state, county and Government bonds, and, with the exception of one or two instances where it acted for one of its principal customers, prior to 1910 it did not deal in corporate stocks. In or about June, 1905, the Detroit, Toledo & Ironton Railway Co. contracted for the purchase of 30,100 shares of the preferred stock and 21,900 shares of the common stock of the Ann Arbor Railroad Co. It agreed to pay therefor $5,500,000 of its 5 per cent collateral trust gold notes, the payment of the principal and interest of which were secured by pledging and hypothecating the stock purchased, together with $5,000,000 par value of general mortgage bonds issued against the properties of the said Detroit, Toledo & Ironton Railway Co. The United States Mortgage & Trust Co. of New York was named trustee under the collateral trust agreement. The collateral trust notes which were issued were payable on December 1, 1908, and the interest was payable semiannually on June 1 and December 1. At the time of this issue of collateral*2404 trust notes by the Detroit, Toledo & Ironton Railway Co. the president of the bank was Leopold Kleybolte, who was also a member of the brokerage firm of Rudolph Kleybolte & Co. That firm had underwritten a portion of the collateral trust notes and on or about July 2, 1906, Leopold Kleybolte sold the bank 482 notes, each of $1,000 denomination, at a total cost of $457,900. Subsequent to this purchase the bank acquired an additional 50 notes from Albert Kleybolte and 56 notes from Rudolph Kleybolte, sons of Leopold Kleybolte, at a total cost of $106,000. Those 106 notes had been pledged as collateral for loans in excess of the face value of the notes. The bank loaned several sums of money to Rudolph Kleybolte & Co., taking as collateral security therefor 625 shares of Ann Arbor Railroad Co. preferred. In 1908 or 1909 that company defaulted in payment of its notes and the said shares of stock were acquired in satisfaction of the indebtedness, which was in excess of $62,500, the par value of the stock so received. On June 1, 1908, the Detroit, Toledo & Ironton Railway Co. defaulted in the payment of its semiannual interest, and thereafter failed to take up the collateral trust*2405 notes when they became due on December 1, 1908, and thereupon the noteholders of the Detroit, Toledo & Ironton Railway Co. formed a committee to hold the notes, vesting in said committee certain specific powers which were set forth in a noteholders' agreement dated February 3, 1908, as amended February 20, 1908. That agreement provided that the collateral trust notes should be deposited with the Empire Trust Co. of New York, which company was to issue receipts therefor in the form of certificates of deposit. Under the terms of the agreement the committee *403 was made trustee of an express trust, with the legal title to all the notes and coupons deposited thereunder as therein provided. In addition to vesting ownership and absolute title to the notes in the committee, the depositors constituted and appointed the committee their attorneys in fact and gave to the committee each and every right, power and privilege that the depositors had theretofore possessed. The bank was a party to that agreement and deposited its notes with the Empire Trust Co., receiving in exchange therefor three separate certificates of deposit showing that it had deposited notes having a face value*2406 of $482,000, $56,000, and $50,000. The first two certificates were issued on September 6, 1910, to Newman Erb, the bank's agent, and the third was issued to the bank on November 4, 1910. The United States Mortgage Co. foreclosed the general mortgage upon the properties of the Detroit, Toledo & Ironton Railway Co. and the court ordered the 30,100 shares of preferred and 21,900 shares of common stocks of the Ann Arbor Railroad Co. and bonds of the Detroit, Toledo & Ironton Co. sold. In November, 1910, representatives of thf committee bought in those shares of stock and mortgage bonds, paying therefor $2,500,000. After the committee had acquired said stock and bonds it purchased the remaining outstanding notes, with the exception of 59, for $1,081,812. These notes were secured by 9,275.81 shares of preferred and 6,769.09 shares of common stock of the Ann Arbor Railroad Co. It was at or about this time that a decision was reached to form a holding company to hold the stock of the said railroad company, and the Ann Arbor Co. was incorporated under the laws of the State of Delaware for the express purpose of acquiring and holding the preferred and common stocks of the Ann Arbor*2407 Railroad Co., and for no other purpose. In order to defray the expenses of acquiring the remaining notes as aforesaid, the committee levied an assessment upon the holder of each of the original notes. The petitioner's proportionate share of the assessment was $208,289, which it decided to pay in order to try to save its prior investments since the future prospects of the Ann Arbor Railroad Co. appeared to be very good. It paid the assessment in February, 1911. Upon payment of the assessment levied by the committee, the noteholders received their proportionate share of the preferred and common stocks of the Ann Arbor Co. The March 1, 1913, bid and asked prices for Ann Arbor common and preferred stocks were: common - bid, 15, asked, 30; preferred - bid, 50, and asked, 80. From 1911 until the dissolution of the said Ann Arbor Co. the bank carried the preferred and common stocks of the Ann Arbor *404 Co. on its books as an asset of the bank. The other securities of the bank were carried in a separate account and were inventoried from time to time in order to determine profits or losses. Neither the stock of the Ann Arbor Co., nor the notes of the Detroit, Toledo & Ironton*2408 Railway Co. exchanged therefor, were ever offered by the bank for sale, and throughout the period 1911 to 1916 the said stock remained as an asset of the bank. From the date of dissolution of said company, hereafter discussed, to the date when they were sold the bank carried the preferred and common stocks of the Ann Arbor Railroad Co. among the bank assets as an investment. The value of the Ann Arbor Railroad Co. properties as of June 30, 1915, was determined by the Interstate Commerce Commission in a decision promulgated July 5, 1924, 84 I.C.C. 159. On page 179 of that report the Commission finds that "After careful consideration of all the facts submitted in this proceeding, including appreciation, depreciation, going concern value, working capital, and all other matters which appear to have a bearing upon the values here reported, the values for rate making purposes of the property of the carrier * * *" are found to be as follows: Wholly owned and used $11,046,455 Wholly owned but not used 30,785 11,077,240 That valuation included $233,754 on account of working capital, materials, and supplies. The net income reported to the Interstate*2409 Commerce Commission by the Ann Arbor Railroad Co. for the period July 1, 1904, to June 30, 1916, was as follows: [1905] $266,094.93 [1906] 430,704.77 [1907] 377,442.64 [1908] 60,396.44 [1909] 22,243.84 [1910] 90,291.42 [1911] $163,145.62 [1912] 157,866.17 [1913] 155,342.59 [1914] 78,044.14 [1915] 100,756.78 [1916] 300,059.66 The capital stock of the Ann Arbor Railroad Co. outstanding in 1916 had a par value of $7,250,000, being composed of 40,000 shares of preferred at $100 par and 32,500 shares of common at $100 par. Each class of stock had voting rights, and in 1916 at the dissolution of the Ann Arbor Co. the petitioner was the largest stockholder of the Ann Arbor Railroad Co. The funded debt of the Ann Arbor Railroad Co., as shown by the decision of the Interstate Commerce Commission, page 195, was $10,010,842.81; $1,798,235.21 thereof was held by or for the company, and $8,212,607.60 was held by the public. *405 The book value of the assets of the Ann Arbor Railroad Co. as of June 30, 1916, was reported to the Interstate Commerce Commission as follows: Assets Investment in road and equipment property, stocks, bonds, advances, etc $17,438,279.27 Current assets 612,012.85 Unadjusted debits 46,607.12 18,096,899.24 Liabilities Capital stock $7,250,000.00 Long-term debt 8,131,458.24 Current liabilities 759,187.50 Deferred liabilities 17,474.43 Unadjusted credits 311,609.46 Corporate surplus 1,627,169.61 18,096,899.24 *2410 In January, 1916, the preferred and common stocks of the Ann Arbor Railroad Co. and the bonds of the Detroit, Toledo & Ironton Railway Co. were distributed to the stockholders of the Ann Arbor Co. and the latter company was dissolved. By this distribution the bank received 4,716.348 shares of preferred stock and 3,442.152 shares of common stock of the Ann Arbor Railroad Co. and approximately $154,000 of Detroit, Toledo & Ironton Railway Co. mortgage bonds. The bank purchased in addition to its proportionate shares, 1.65 shares of preferred stock and 2.84 shares of common in order to hold full shares, thus giving it 4,718 shares of preferred and 3,445 shares of common. Throughout the period that the bank owned the stock of the Ann Arbor Co. and the stock of the Ann Arbor Railroad Co. these securities were carried on its books in a different manner from securities that were bought for resale to bank customers. Those stocks were considered assets of the bank and as such their values on the books were fixed by the board of directors, while the values of securities sold to customers were fixed by the officers of the bank. From time to time the board of directors had occasion to*2411 reduce the values at which the preferred and common stocks of the Ann Arbor Railroad Co. were carried on its books so that the book values would be conservative. From 1911 to 1924 the book values per share of the said stocks were as follows: Year Preferred Common [1911] $90 $50 [1916] $65 $20 1/2 [1921] $35 $1 [1] In 1913 the bank charged off on its books, and deducted on its return, $153,987.58 representing Detroit, Toledo & Ironton Railway Co. *406 bonds which it considered worthless. For the same year, as a result of reducing the values of its preferred and common stocks, the bank charged off on its books and deducted on its return $93,540 for Ann Arbor Co. common stock and $85,380 for Ann Arbor Co. preferred stock. The respondent refused to allow any of those deductions for 1913. In 1914 the bank charged off on its books $26,715 representing a reduction in the book value of Ann Arbor Co. preferred stock, but no deduction was made on its return, due to respondent's action for 1913. In 1915 no change*2412 was made in the book value, nor was any deduction claimed in the return for that year. In 1916 the respondent allowed the deduction claimed in the bank's return for that year of $153,987.58 representing Detroit, Toledo & Ironton Railway Co. consolidated mortgage bonds which had been previously charged off the bank's book in 1913. In 1917 the bank charged off on its books $67,177.50 representing a reduction in book value of the common stock and $106,860 for preferred stock of the Ann Arbor Railroad Co., but these charge-offs were not claimed as deductions on its tax return for the year 1917. The large charge-offs in value for 1917 were partly due to the fact that the bank was recapitalized in 1918 and the directors wanted the bank's assets conservatively valued. In 1918 the bank charged off in its books $16,029 for reduction in value of the preferred stock of the Ann Arbor Railroad Co. but claimed no deduction therefor in its tax return, which amount the respondent voluntarily allowed. In 1919 it charged off $26,715 for preferred stock that was not included in its income-tax deductions, which amount the respondent also voluntarily allowed. In 1920 the bank charged off $10,686, *2413 representing a reduction in value of preferred stock, and included it with the deductions in its 1920 return, and that amount was allowed by the respondent. The amounts voluntarily allowed as deductions for 1918 and 1919 were of no benefit to the bank for the reason that throughout the period 1913 to 1925, inclusive, the total deductions reported on the tax returns of the bank exceeded its total income for each year. The returns for 1918, 1919, and 1920 showed: Income Deductions [1918] $346,316.88 $405,519.99 [1919] 400,213.65 479,079.10 [1920] 690,944.89 754,021.95 On June 5, 1922, the bank sold 2,428 and on December 27, 1922, 2,015 shares of preferred stock of the Ann Arbor Railroad Co. at $40 per share. It computed a book profit of $22,215, but in its return for 1922 it claimed a loss on the sale of those shares of $33,744, arrived at by the use of the March 1, 1913, value of $50 as the basis *407 for computing the gain or loss, which results in a loss of $44,430. From this latter amount it deducted the $10,686 claimed and allowed as a deduction from 1920 income, leaving $33,744 as the net loss from the sale of the said preferred stock in*2414 1922. On June 1, 1923, the bank sold the remaining 900 shares of Ann Arbor Railroad Co. preferred at $40 per share. In that year, however, the bank included in its return a profit of $4,500, which is the difference between the book value of $35 and the selling price of $40. On May 6, 1925, the bank sold 3,445 shares of common at $27 a share. On its return for 1925 the bank reported the sale price as $93,015, the cost as $70,622.50, and the net profit as $22,392.50. The respondent refused to allow the loss claimed by the petitioner in 1922 and used as a basis for computing gain or loss the book value of the preferred and common stock at the time such stock was sold. The respondent used the book value of the stocks as a basis for computing gain or loss, for the reason that the petitioner was a licensed dealer in securities during the period in which the stocks were owned and, therefore, they should be valued by the inventory method. In determining the basis for computing gain or loss on the sale of the common stock the respondent held that the book value of $1 per share was too low and valued the common stock at $3 per share, giving a depreciated book value at January 1, 1925, of*2415 $10,335, and a book profit of $82,680. As the petitioner had reported a profit of $22,392.50, respondent found an additional profit of $60,287.50. The preferred and common stocks of the Ann Arbor Railroad Co. had a fair value in February, 1916, of $65 and $25 a share. The Marmet Coal Co., of which Edwin Marmet, son-in-law of Leopold Kleybolte, was a stockholder and officer, dealt with the bank and owed it money for many years. That company owned a piece of river-front property in Cincinnati and also mining properties in Charleston, W. Va. It operated boats on the river and boats for shipping coal to Cincinnati and at one time did a considerable business in that city. The Marmet Coal Co. curtailed its loans from time to time, but was never able to completely liquidate them. The company fell behind and the bank was compelled to help it out. It issued bonds secured by a mortgage on the property but finally could not pay the interest on the bonds and went into the hands of a receiver, who operated the properties unsuccessfully. Thereafter the Cincinnati and West Virginia properties were sold in two parcels. In 1911, prior to the bond issue, the Marmet Coal Co. owed the*2416 bank $125,000, and upon issuance of the bonds the bank received a portion thereof. Other bonds were acquired by the Second National *408 Bank, which also had a claim against the Marmet Coal Co., and subsequently the petitioner bought the bonds held by that bank for $50,000. The petitioner also purchased $80,000 worth of said bonds at 25 cents on the dollar, and some at 15 cents on the dollar, increasing that company's bonded indebtedness to the bank to $200,000. When the properties were sold the petitioner's president bid in the coal mines for $100,000, that bid being the only one made; he also bid in the Cincinnati river-front property for $35,000. The bank did not purchase the properties to operate them, but felt that by so doing Marmet could be put in charge and would ultimately straighten out the financial difficulties. As a result of the various transactions aforesaid the bank, on or about June 19, 1920, had become the owner of the Marmet Co.'s properties at the cost of $135,000 and was a creditor for a further sum of approximately $215,000. On that date the bank deeded the property to Edwin Marmet for $70,000 in cash and $280,000 in notes, there being five notes*2417 of $50,000 each and one of $30,000. On December 18, 1920, Marmet paid the first note of $50,000 and $6,900 interest on the remaining notes up to June 19, 1921. No further payments, either by way of principal or interest, were ever made by Marmet or by the coal company, nor was a note given for interest from and after June 19, 1921. After acquiring the properties in June, 1920, Marmet operated them up to the latter part of 1921, but as the operations were conducted at a loss he was forced to borrow further sums from the bank to meet his obligations. The bank felt obligated to make these additional loans for the reason that creditors were pressing Marmet and the bank did not want to foreclose and take over the property. Also, it was felt that, if the coal properties were nursed along, in time they would become more valuable and the bank would be able to realize the greater portion or all the moneys which it had advanced. Subsequent to 1920 the bank made the following loans on the dates specified to the Marmet Coal Co.: Dec. 8, 1921 $4,155.00 Dec. 23, 1921 5,000.00 Jan. 16, 1922 6,000.00 Feb. 27, 1922 1,000.00 Mar. 9, 1922 1,845.00 Apr. 26, 1922 5,000.00 May 24, 1922 1,500.00 June 7, 1922 $2,000.00 June 22, 1922 4,000.00 July 14, 1922 2,500.00 May 12, 1925 3,310.00 July 17, 1925 9,582.82 Total 45,892.82 *2418 The above loans were unsecured and only about $20,000 thereof was ever repaid. During the period 1922 to 1926, inclusive, the president and vice president of the bank visited the mining property of the Marmet Coal Co. from time to time, the vice president averaging three or *409 four trips yearly. The condition of the mine and equipment was investigated and the prospects of disposing of the property were gone into. In 1924 the equipment was rusty and obsolete, water was in the mine, and the condition of the property generally was not good. At one time the bank offered the property for sale at $700,000 but was unable to sell. Later, the bank offered its claim to Edwin Marmet for 50 cents on the dollar, but, as Marmet had nothing but his interest in the property, he was unable to make the purchase. The bank preferred to let Marmet look after the property, as he kept it up and paid the taxes, whereas if the bank had foreclosed it would have had to pay the taxes, look after the property and lay itself open to liability in case anyone was injured in or about the mines. The interest on $230,000 of the loans aforesaid, from June 19, 1921, to July 1, 1925, amounted to $55,660. *2419 The interest on $36,310 of the indebtedness, from June 19, 1921, to May 12, 1925, amounted to $7,184.93. Of the latter amount $4,153.44 represented interest on the various amounts advanced up to July 7, 1923, which said amount was credited as earnings but was never received, and $13,000 of the $55,660 was credited as earnings on the petitioner's books of account as interest, but that amount was not received. There were no amounts received for interest subsequently to June 19, 1921. Of the $62,844.93 interest included in the notes secured by the $338,737.75 mortgage, there were but two amounts credited as earnings, i.e., the $13,000 and $4,153.44 just referred to. In preparing its income-tax returns the petitioner decided that since it had not received the interest, although the amounts had been credited as earnings, it was justified in making the deductions and, therefore, on June 30, 1924, it deducted $18,000 on account of the principal of said loans and $4,153.44 of the interest not received, making a total of $22,153.24. For the same reason the petitioner deducted on June 30, 1925, $13,000 of interest not received and $60,000 on account of principal of said loans. The $60,000*2420 deduction was purely an arbitrary figure and represented the bank's determination of the loss in value of the mortgage loan. On June 30, 1926, the bank charged off on its books $27,919.85, which amount came from the noteteller's desk. Prior to these charge-offs in 1924, 1925, and 1926 the notes were carried as assets of the bank, but as these amounts were charged off they were carried through the profit and loss account although the bank continued to hold the notes as a liability against the makers. That amount was claimed as a deduction by the petitioner in its tax return for 1926. Each of the deductions aforesaid was disallowed by respondent. *410 OPINION. MORRIS: The first question is the basis to be used in determining gain or loss resulting from sales of Ann Arbor Railroad Co. stock in 1922 and 1925. The petitioner contends that it acquired all the railroad stock and held that same as an investment; that as to the 625 shares of preferred acquired in 1908, the basis should be the fair market value on March 1, 1913, and that as to the remaining shares of stock, both preferred and common, the basis should be cost. The respondent contends that petitioner was*2421 at all times a licensed dealer in securities; that such securities were properly and consistently inventoried at market, and that the inventory method is the proper basis for computing gain or loss on the sale of any or all of said stocks. The sections of the Revenue Act involved in determining this question as to the preferred stock are sections 202 and 203 of the Revenue Act of 1921. Section 202 provides in part as follows: (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that - (1) In the case of such property, which should be included in the inventory, the basis shall be the last inventory value thereof; * * * (b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but - * * * (2) If its fair market price or value as of March 1, 1913, is lower than such basis, the deductible loss is the excess of the fair market price or value*2422 as of March 1, 1913, over the amount realized therefor; Section 203 provides: That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. In Regulations 62, relating to the Revenue Act of 1921, the respondent has interpreted section 203 with particular reference to inventories by dealers in securities as follows: ART. 1585. Inventories by dealers in securities. - A dealer in securities, who in his books of account regularly inventories unsold securities on hand either (a) at cost or (b) at cost or market, whichever is lower, or (c) at market value, may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all these securities must be inventoried by the same method, and that such method must be adhered*2423 to in subsequent years, unless *411 another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation, and not in the course of an established business * * * are not dealers in securities within the meaning of this rule. * * * The basis for determining gain or loss with respect to the sale of the common stock in 1925 is set out in section 204(a) of the Revenue Act of 1924, which states that "the basis for determining gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such*2424 property * * *." In view of the provisions of the Revenue Acts and the regulations with respect thereto, it is important to determine whether the notes and the stocks received therefor were acquired by the bank for resale or as an investment. With respect to that question, in view of the already very lengthy statement of facts, it would seem only necessary to repeat here the salient factors inducing us to the belief that these securities were in fact held for investment and not for sale to its customers. The record shows that the bank purchased only Federal, State, county, municipal, and public utility bonds for sale to its customers, except in one or two isolated instances. We are satisfied, certainly, that it was not the general practice of the bank to deal in corporate stocks. We are constrained to the belief that the purchase was somewhat influenced because of the dual relationship occupied by Leopold Kleybolte with the bank and his brokerage interest, and because of this relationship we feel certain that the bank would not have purchased the original notes for sale in competition with Kleybolte's brokerage interests. Furthermore, the notes were for a very short term and*2425 consequently offered very little inducement to the average investor. The record shows that the notes were carried in the books of account of the bank as an asset, that they were never offered for sale, and that they were carried separately and in an entirely different manner from which securities held for resale to customers were handled. From 1911 until the dissolution of the Ann Arbor Co. in 1916 the stocks of that company received in exchange for notes surrendered thereto were carried on the books of the bank as an asset, while other securities, as we have already explained, were carried in a separate account and inventoried from time to time in order to determine profits or losses. The record is emphatic, and we have found as a fact, that neither the stocks of *412 the Ann Arbor Co. nor the notes of the Detroit, Toledo & Ironton Railway Co. were ever offered for sale by the bank throughout the period 1911 to 1916. Upon dissolution of the said Ann Arbor Co. the bank received the stocks here in question of the Ann Arbor Railroad Co. and the record shows also that those stocks were carried as an investment among the bank's assets. It is true that certain evidence was offered*2426 by the respondent to minimize the value of the testimony given by the petitioner's witnesses, but that evidence was satisfactorily overcome by the petitioner. Considering these factors and all of the other facts and circumstances set forth in the findings of fact herein, and in the recorded testimony of witnesses, we are of the opinion that with respect to the securities in controversy the petitioner was not a dealer as the respondent contends, and, therefore, they should not be inventoried as in the case of securities purchased for resale. Therefore, since the inventory method is inapplicable to the securties in question, we must determine and prescribe the bases to be applied to the 625 shares of preferred stock of the Ann Arbor Railroad Co. acquired in 1908, and the remaining shares acquired in 1916 upon dissolution of the Ann Arbor Co. The 625 shares of Ann Arbor Railroad Co. stock were acquired in 1908, by reason of the default of Rudolph Kleybolte & Co. upon certain loans, at a cost to the bank of not less than $62,500, the par value of said stock being $100 per share. Evidence with respect to the March 1, 1913, value of the said stock was presented of the bid and asked*2427 prices on that date as found in the Commercial and Financial Chronicle, which showed that there was bid 15, and asked 30, for the common stock, and bid 50, and asked 80, for the preferred stock. In Ralph Andrew Applegate,10 B.T.A. 705, where the March 1, 1913, value was in controversy, the Board had before it similar evidence as to the March 1, 1913, value; that is, the bid and asked prices on the New York Stock Exchange. We held there that the respondent was not warranted in taking the lower of the two figures as the fair market value, nor the petitioner the higher figure, but that an average of the two prices more nearly represented and should be taken as the fair market value as of March 1, 1913. For the purpose of determining the March 1, 1913, value of the said 625 shares, we are of the opinion that an average of the bid and asked prices, to wit, $65 per share, should be used. Since the fair market value on March 1, 1913, was lower than cost, the March 1, 1913, value should be adopted as the basis for determining the loss, which will be the difference between said value and the amount realized therefor. *2428 The block of 625 shares of preferred stock was not segregated and identified separately from the remaining shares sold in 1922 and 1923. However, in the absence of evidence segregating and *413 identifying those shares, they, being the first acquired by the bank, will be deemed to have been included with the 4,443 shares sold in 1922. See George W. Megeath et al.,5 B.T.A. 1274; Towne v. McElligott,274 Fed. 960, 963; David Stewart,17 B.T.A. 604. Also, see article 39, Regulations 62, as amended by T.D. 3403. The basis applicable to the remaining shares of the Ann Arbor Railroad preferred sold in 1922 will depend upon when they were "acquired" within the meaning of the Act; that is, whether they were acquired prior to February 28, 1913, or subsequently thereto. The facts of record, briefly restated, are that the bank originally became the owner of collateral trust notes of the Detroit, Toledo & Ironton Railway Co., which said company defaulted in the payment thereon in 1908, whereupon the noteholders, of which the petitioner was one, formed a committee, under a noteholders' agreement dated February 3, 1908, as*2429 amended February 20, 1908, providing for the deposit in trust of the said notes, and for the receipt therefor in the form of certificates of deposit. Under the terms of that agreement the committee was made trustee of an express trust, with legal title to all the notes and coupons so deposited. The bank accordingly deposited its notes with the depositary, receiving certificates of deposit in three separate sums of $482,000, $56,000, and $50,000 in 1910. The general mortgage of the Detroit, Toledo & Ironton Railway Co. was foreclosed and in November, 1910, representatives of the committee purchased the 30,100 and 21,900 shares of preferred and common stocks, respectively, of the Ann Arbor Railroad Co. In 1911 it was decided to form a holding company to hold the securities then held by the committee, and the Ann Arbor Co. was incorporated for the express purpose of acquiring the stocks of the Ann Arbor Railroad Co. and for no other purpose, and thereupon the noteholders received their proportionate share of stock of the Ann Arbor Co. Thus, the petitioner first owned collateral trust notes of the Detroit, Toledo & Ironton Railway Co.; thereafter, certificates of deposit representing*2430 said notes deposited with the committee; and then, finally, corporate shares of the Ann Arbor Co., the latter of which it held until the dissolution of the said Ann Arbor Co. in 1916, when it surrendered its shares in that company for the shares of stock of the Ann Arbor Railroad Co., together with a portion of the bonds of the Detroit, Toledo & Ironton Railway Co. Under this state of facts it is difficult to see how it can be logically said that the petitioner received stock of the Ann Arbor Railroad Co., other than the 625 shares hereinabove disposed of, prior to 1916, when the Ann Arbor Co. dissolved. We are of the opinion, therefore, that the cost in 1916 should be adopted as the basis for computing the gain or loss upon the shares so acquired. Since the shares of the Ann Arbor Railroad Co. were acquired for shares of the Ann Arbor *414 Co. the fair market value of the shares received will be adopted as cost, which we have found to be $65 a share for the preferred and $25 a share for the common. The second issue involves the deductibility of certain amounts that were charged off in 1924, 1925, and 1926. Petitioner alleges that these amounts were ascertained to be*2431 worthless in the year charged off and that, therefore, the deductions should be allowed under section 234(a)(5) of the Revenue Acts of 1924 and 1926. The provisions of this section in the two Acts are identical and read as follows: SEC. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * * (5) Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part. While the respondent concedes that the amounts in question have been charged off by the petitioner, the section of the statute aforesaid only requires that we be satisfied that the debt is recoverable only in part, and, if so, it may be charged off in part. In the first place the Marmet Coal Co. had been indebted to the petitioner for a great number of years, reducing its indebtedness from time to time, but never being entirely out of its debt. It issued bonds in order to raise funds with which to conduct its*2432 business, but was unable to pay even the interest on said bonds and it was compelled to go into the hands of a receiver, who operated the properties at a loss, and they were, therefore, put up for sale. The petitioner, being the only bidder, acquired the mine for $100,000, and the Cincinnati property for $35,000, in order that it might place Marmet in charge with the hope that he would ultimately straighten out its financial difficulties. The properties were thereupon deeded to Marmet for $70,000 in cash and $280,000 in notes, being approximately the indebtedness to the bank. Marmet paid the first note of $50,000 and also $6,900 of interest on the remaining notes up to June 19, 1921. No further payments were made thereafter either on the principal or interest. The record shows that Marmet operated the properties at a loss up until the latter part of 1921 and that he was forced to borrow further sums of money at the bank to meet his obligations, and that it was because of the fact that his creditors were threatening to press their claims to judgment and levy execution upon the properties - something which the petitioner wished to avoid, because it realized that it would be compelled*2433 to bid the property in itself, that it advanced said sums of money to him. The whole record abounds with evidence of a thoroughly unprofitable and unstable business enterprise, with a record for such instability *415 dating back over a period of many years. But the question may very properly be asked, why, in view of these conditions, known to the petitioner and its officers, did it continue to advance funds during the very period of time when it is claiming a deduction for amounts which it contends are worthless and uncollectible? We believe this question has been satisfactorily answered by the petitioner's witnesses. It was the ever present and eternal hope of success and recovery of a great portion, if not all, of the indebtedness which spurred the petitioner on and caused it to make further advancements to Marmet and his company. As we view the matter from the record, it was a case of helping Marmet and his company financially or allowing Marmet's creditors to levy execution upon the properties of the company and compel the petitioner, in order to protect its own interest in the matter, to bid the property in at a public sale. This, as we have already said, was something*2434 which the petitioner very carefully attempted to avoid. Realizing the deplorable state of affairs, the petitioner's officers visited the mining properties of the Marmet Coal Co. and investigated the condition of the mine and equipment and the prospects of disposing thereof. They found that in 1924 the equipment was rusty and obsolete, that water was in the mine, and that the condition generally was not very good. Petitioner offered to sell the properties upon a number of occasions, but was unsuccessful. It offered its claim to Marmet for 50 cents on the dollar, but, since Marmet's only asset was his interest in the mining property, he was unable to negotiate the purchase. Taking into consideration the past history of Marmet and his company, the amount of the indebtedness, the then state of affairs and the fact that Marmet had been unable to even pay the interest upon his indebtedness, the petitioner's officers decided upon what they regarded as a fair amount that should be written off during each of the three years 1924, 1925, and 1926. In 1924 it deducted $18,000 on account of the principal of said indebtedness, and $4,153.44 of interest which it had accrued on its books*2435 of account but which it had not received; in 1925 it deducted $60,000 on account of the principal, and $13,000 of interest which it had accrued but had not received; and in 1926 it deducted $27,919.85, all of which said amounts the respondent has disallowed. Considering all of the factors which we have discussed at some length and the testimony of witnesses of record, we are of the opinion that the respondent was in error and that the deductions should be allowed. Reviewed by the Board. Decision will be entered under Rule 50.